Oil rebounded from another sharp drop as OPEC ministers prepared to meet amid booming volatility.
West Texas Intermediate rallied as much as 4.6 per cent after shedding almost $4 on Tuesday. That selloff was driven by escalating concerns over the impact on demand of the omicron virus variant and prospects for a faster tapering of stimulus by the U.S. Federal Reserve.
The focus now shifts to the reaction from producers. The Organization of Petroleum Exporting Countries and its allies meet Wednesday and Thursday to set output policy, with some analysts expecting the group to pause supply hikes. The U.S. frustrated OPEC+ last week by announcing a release from its strategic reserves, though has since moved to cool tensions with Saudi Arabia.
Crude’s deteriorating fundamentals are reflected in a weakening price structure along the curve, while technical selling has also reinforced the market’s recent downward spiral. Yet Goldman Sachs Group Inc. said Tuesday that oil prices have now “far overshot” the likely impact of omicron.
OPEC+ has “erred on the side of caution since it began slowly boosting supplies,” said Stephen Brennock, an analyst at PVM Oil Associates. A potential decision to shelve January’s planned increase and keep quotas flat “comports with its cautious approach.”
- WTI for January rose 4.2 per cent to $68.93 a barrel at 10:06 a.m. London time
- Brent for February settlement climbed 4.5 per cent to $72.31 a barrel
Oil’s volatility has spiked, with WTI closing down 13 per cent on Friday before climbing on Monday and slumping again Tuesday. Gauges of swings in both WTI and Brent are at their highest since May 2020.
Goldman said that while the drop in prices was understandable in the context of low year-end liquidity and risk appetite, the retreat was “excessive,” reiterating language it’s used in other recent market commentary.
Although oil remains in backwardation – a bullish structure with near-term contracts trading above later-dated ones – differentials have narrowed. Brent’s prompt spread was 38 cents a barrel, down from $1.20 a week ago.
© 2021 Bloomberg L.P.